Risk and Volatility: How to Think Pro tably about Them in .NET

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Risk and Volatility: How to Think Pro tably about Them
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preferred stocks and notes of Goldman Sachs, General Electric, Wrigley, Dow Chemical, and Swiss Re In addition, in November 2009, Berkshire announced plans to acquire Burlington Northern Santa Fe which will constitute its largest acquisition ever These investments seem to have been in uenced, in part, by the market decline
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More on Downside Risk
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The best way to avoid nancial catastrophe is to understand downside risk well If possible, you should completely avoid stocks that have a large downside risk Downside risk is not just a default risk for bonds or bankruptcy risk for stocks; you should also incorporate the risk of a large decline in a company s market value owing to adverse developments For example, a company investing in mortgage-backed securities may see a large negative effect on its stock prices if housing prices fall When housing prices are going up, stock prices of such companies may also go up They may appear to be good buying opportunities, but note that downside risk is also going up at the same time As another example, consider buying stocks on margin A decline in the stock market may result in a margin call that may require selling off the securities at a time when buying is more desirable An investor who has thought about the downside risk carefully is more likely to avoid investing on margin and avoid ruin in the long run Large public corporations do not default often, but sometimes they do Some large companies have suddenly gone bankrupt (for example, Enron and WorldCom), and their stockholders have lost their investments completely In early 2007, Bear Stearns stock price was $150 per share, but the company was sold to JP Morgan for just $10 per share a year later As an investor, you should take this into account In general, you should be especially careful in investing in highly leveraged companies At least compare their nancial leverage with the corresponding industry leverage, and avoid investing a large percentage of your net worth into highly leveraged companies Earlier, we talked about the risk of in ation that can be serious even in countries like the United States The problem with in ation is not
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risk, diversification, and when to sell
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in ation itself The problems arise from the unforeseen hardships for those who are not prepared for a substantial fall in the purchasing power of their savings or for the economy shedding jobs Buffett says, In our opinion, the real risk an investor must assess is whether his aggregate after-tax receipts from an investment (including those he receives on sale) will, over his prospective holding period, give him at least as much purchasing power as he had to begin with, plus a modest rate of interest on that initial stake 9 To avoid in ation risk, you can invest in in ation-adjusted Treasury securities or the so-called TIPs After all, you are probably not investing in Treasuries for high returns You can also avoid some in ation risk by owning real assets For example, it makes a lot of sense to own your own house If you have a mortgage, a xed-rate mortgage is better because it allows you to avoid the large surprises that can result from a variable rate In my opinion, you should pay off your mortgage as soon as possible so that you have the security of owning your own home (and your monthly expenses do not include a mortgage payment) in the event you lose your job If possible, you should try to acquire some other real estate; maybe some farmland so that you can live there and grow your own food if things really go south! Finally, you should not ignore short-term investments in money markets because they are liquid, and the rates usually adjust as in ation rises Overall, safety rst and liquidity are good rules that people often forget when the going is good Berkshire has always maintained high liquidity and low nancial leverage Shouldn t you Another downside risk is the decline in the value of the dollar The value of the US dollar against other currencies may decline, which may affect your consumption if you travel abroad To some extent, you can avoid this risk by holding some other currencies; Chinese and European money are logical choices in this situation It is worth summarizing Buffett s outline on how to think about risk He writes10 :
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Though this risk [in owning stocks] cannot be calculated with engineering precision, it can in some cases be judged with a degree of accuracy that is useful The primary factors bearing upon this evaluation are: 1 The certainty with which the long-term economic characteristics of the business can be evaluated;
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